John McCain has a radical plan to change the way Americans get their health care: eliminate the tax break for employer-based health coverage and replace it with a $2,500 tax credit for individuals and $5,000 for families. It’s one piece of his Bush-like plan to push people into the deeplyflawedindividualmarket.

Reforming the tax treatment of health insurance, done right, could be an important part of health reform. Here’s the problem: McCain’s plan would raise taxes on millions of families, falling mainly on the middle-class, while failing to make insurance affordable for many others, especially low-income families and people with pre-existing conditions.

A central flaw in McCain’s plan: his new tax credit grows at the rate of inflation (about 2 percent a year) rather than the rate of health care costs (about 7 percent a year — which the current tax benefit matches). In 2009, McCain’s credit will cover 36% of the costs of an average family premium, by 2018 it would only cover 24%. This means that most families who get health insurance through work will see a dramatic increase in taxes.

This chart shows the tax effects on a couple earning $40,000 and paying $14,000 in premiums each year (the average premium cost in 2009 as predicted by CBO growth rates).

In 2009, McCain’s plan would cut their taxes by $50, but by 2013, as the value of the credit erodes, this family’s taxes would increase more than $1,100. By 2018, they will be paying over $2,800 more.

It’s unlikely that Sen. McCain really wants you to be paying higher taxes. He is after a different target: a radically different health care system, where families pay more of their own costs and choose among deregulated insurance companies. But few families facing a hefty tax increase will consider themselves better off.